With its disguises of “high finance” for the baffled and “Keynesian fiscal policy” for the “in the know”, UK government deficit spending was a fairly successful scam for a long time. When the former prime minister inaugurated her new government in September, Liz Truss followed tradition and tried to run the much-used scam again.
But this time it didn’t work. Eventually, even successful scams stop working. Her failure became hers but also her party’s, the Conservatives. Neither of them understood the limits of the scam. Perhaps their disguises had worked better on those who repeated them the most in thought and word.
In its UK version, the deficit spending scam involved Conservative governments (but also some Labour) repeatedly cutting taxes on corporations and the wealthy. Serving your donors explains most of this. Without this scam, such behavior would have forced governments to act in traditional ways that they now sought to avoid. One way would be to raise taxes on others to offset tax cuts for corporations and the wealthy. Governments have only dared to do so partially, never enough to make up for lost revenue from tax cuts that benefit corporations and the wealthy.
The other way would be to cut public spending. Governments did that, too, especially when conservatives reframed public services as unnecessary, wasteful, counterproductive, or, in short, “socialist.” But doing so infuriates the masses and risks losing votes for the government. Even when the masses could be distracted by campaigning against select foreigners (through Brexit against Europe and Ukraine against Russia), cuts in public services never made up for what corporations and the wealthy were saving by cutting their taxes.
Enter the scam that claimed deficit spending “solved” governments’ problems. Governments could 1) continue to cut taxes on their wealthy patrons, 2) avoid offsetting tax increases on the middle and poor, and 3) avoid cuts in social services. The scam involved spending without taxes to raise the funds needed to support the spending (“deficit spending”).
While deficit spending violated traditional rules for governments to balance their budgets, new and extreme economic threats (the dot-com bust, the Great Recession, the Covid-19 crash, and the sanctions war against Russia) justified trying to implement the scam. Alternatively, deficit spending could be justified as a practical and unfortunate necessity to manage those recurring business cycles.
Deficit spending became the magic sauce of politicians. It allowed them to brag about all they could spend (for employers and employees) without raising taxes, as if doing so stemmed from the governmental efficiency of politicians. Governments could pander to corporations and the wealthy without being forced to impose government austerity measures on the rest. The 1% earned a lot while the 99% earned little.
The sleazy side of the “going unreported” scam. It was and remains a fact that UK governments borrowed most of the money for deficit spending from UK corporations and the wealthy. Once the government had cut taxes, the money saved by those corporations and the wealthy could and often was lent to that government.
The scam offered some “obvious” opportunity for corporations and the wealthy. Instead of making a one-time tax payment to the government (as other taxpayers do), corporations and the wealthy can lend that money to the government. The government security obtained in return provides full repayment in the future plus annual interest payments until then.
This scam has been running for many years throughout global capitalism. After former Prime Minister Boris Johnson lied his way out of office, Truss surmised that he could and would run the scam again, loudly and proudly, to the usual political applause. All of his predecessors had. But this turned out to be the time and place where the scam would reach its limit.
Ironically, the very beneficiaries of the tax cuts Truss proposed for corporations and the wealthy were the “investors,” who resisted. They took a good look at the financial conditions of the government and decided not to lend it any more money without much higher interest rates (and maybe not even then).
Very quickly, as is often the case, higher interest rates depressed bond prices, threatening UK pension plan assets. Suddenly there was a glimpse of the collapse of the UK economy and its risks to global capitalism. Leading the blind, President Joe Biden said of Truss that he had “made a ‘mistake’.”
The old Achilles’ heel of the scam: At some point, corporations and the wealthy could see too much risk in lending the government the money they saved with their tax cuts. Repeating the scam over decades could build up levels of UK national debt plus conditions in global capitalism that become risky. Lending the UK even more money suddenly made little sense as an investment; other options were better.
It is true that the capitalist political economy places the government in a structurally impossible dilemma. Both the employer and employee classes want government services for themselves and also want to pay minimal taxes. The wealth and power concentrated in the employing class make them consistently more successful in tilting public finances in their favor. They get the services they want and likewise shift the tax burden to others.
When conditions change and they no longer allow the ruling class to prevail in that way to determine what the government does, big changes happen. In the Great Depression of the 1930s, John Maynard Keynes showed how deficit spending could fix broken capitalism without endangering capitalism itself.
In the terrible depths of that crash (capitalism’s worst to date), there was no time or space to worry that the deficit spending “solution” was only partial and temporary or over the limits of its effectiveness. That would excuse Keynes, but not the multitude of politicians, academics, and journalists who could and should have seen, but never did, the scam and injustice involved.
Will the UK working class learn that prevailing economic theories and policies have always been partisan in the class sense of serving and favoring employers over employees? Most of what passes as “the economic policy we need now” is really the plea of a class of self-interested employers. Raising interest rates to fight inflation is a great example these days. Across forms and fields of class struggle, discrediting economic policy claims to be class neutral is an ongoing battle.
This article was produced by Economy for Alla Proyect of the Independent Media Institute.
Richard D Wolff is Professor Emeritus of Economics at the University of Massachusetts, Amherst, and Visiting Professor in the Graduate Program in International Affairs at the New School University in New York. Wolff has a weekly syndicated show, Economic Update. His three recent books with Democracy at Work are youThe disease is the system: when capitalism fails to save us from pandemics or from itself, Understanding Marxism Y understand socialism
